Some industries will not survive in Australia with higher...

Some industries will not survive in Australia with higher pricing. They will move to countries with cheap and plentiful renewable energy as Alcoa has moved to Iceland. Maybe time to look at Australia's geothermal resources with a bit more of a sense of urgency.

http://www.theaustralian.news.com.au/story/0,20867,21715621-643,00.html

Electricity futures shock as turnover quadruples, price doubles

* David Uren, Economics correspondent
* May 12, 2007

PANIC has developed over the Sydney Futures Exchange electricity futures contract as major consumers try to protect themselves from soaring prices while generators seek to profit.

Weekly turnover has leapt fourfold as the price of electricity for delivery in 2008 has jumped from $40 a megawatt hour to $70 in the space of the last six weeks.

"I've never seen anything like it," says Sydney Futures Exchange general manager of emerging markets Anthony Collins.

The daily spot and contract national electricity market has frequent spikes at points of peak demand but Collins says the change in the last six weeks has shifted electricity prices to a completely different level, stretching all the way out to 2011.

"It is being attributed to everything from water shortages to lack of investment in new generation, given the level of prices and all the uncertainty around emissions trading and the cost of carbon."

The electricity market is rife with rumours that at least one large generator is sitting on massive losses, having sold forward to secure a price but no longer having enough electricity to deliver on its contract as a result of water shortages.

Some retailers are also believed to have short sold electricity in the expectation that the autumn would bring the traditional dip in the market. Traditionally, electricity turnover on the Sydney Futures Exchange is only about 20 per cent of total physical trade in the national electricity market, which covers the eastern seaboard, including Tasmania. It has leapt to more than double the level of underlying supply as market participants scramble for cover.

Large industrial users and state regulators both believe there may have been some "gaming" of the market by generators seeking to exploit fears about future supply.

The Electricity Users Association, which represents large industrial users, has written to commonwealth and state governments seeking an investigation of the National Electricity Market, claiming that the spike in prices cannot be justified by drought and unusually high levels of maintenance alone.

"We are aware of some evidence that generators have also changed their bidding behaviour to take advantage of the situation," the association's executive director, Roman Domanski, said yesterday.

State regulators also suspect that some of the larger integrated firms, which include both generating and retailing, may be "managing" prices higher, putting pressure on regulators to authorise higher retail prices.

The SFE's Collins says he believes the move in the market is too big to be the result of any form of manipulation. However, the market is still rising and there is no sense yet that a new equilibrium has been reached.

The increase is putting the national electricity market under the greatest pressure in its nine year history, and casting a shadow over the economy in the year ahead.

The companies in the toughest position are the electricity retailers, particularly those that are not vertically integrated with a generator.

Chief executive of electricity retailer Australian Power and Gas, Jim Myatt, says that while he is buying electricity from the wholesale market, he is selling to a retail market that is regulated by state government authorities.

"State governments are capping our market at one end while the wholesale market is reacting to factors outside the control of government." The state regulators set the prices that retailers can charge households and small business customers.

Many households and small businesses have chosen to buy their power at non-regulated prices, which have until recently been cheaper.

However, they can always switch back to the regulated suppliers, so the regulators set the ceiling for the retail market.

The NSW regulator last week issued a draft recommendation of price increases of about 5 per cent in real terms over each of the next three years but is revisiting its numbers in the wake of the soaring wholesale market.

The Queensland regulator has recommended a 10 per cent price increase.
The Productivity Commission has called for regulated price caps to be scrapped. It argues it is forcing companies to become vertically integrated, defeating the purpose of deregulating the electricity market.

For business customers, however, new contracts are being negotiated with increases of anywhere from 50 to 100 per cent.

Electricity represents 15 to 20 per cent of costs for industries such as paper, cement and steel. The increased cost can be expected to flow through into economy-wide costs in the same way as last year's oil price increase.

The drought is the most obvious cause of the price spike. Snowy Hydro and Tasmania have essentially ceased delivering peak power. When Tasmania was joined to the national grid, it was expected to be a major supplier to southeast Australia but is instead importing power.

The peak power load is now being delivered by gas turbines.

More serious is the shortage of water for the cooling towers of the major coal-fired power stations which deliver base load. Tarong, in Queensland, has had to cut back its base load by 850 megawatts, which is about 5 per cent of base load supply to the national market.

The major Victorian base load stations in the Latrobe Valley have been buying water on commercial markets because their entitlement is not enough to keep the cooling towers supplied and there are concerns about their security of supply.

The executive director of the National Generators Forum, John Boshier, says major maintenance is usually planned for autumn and spring, which are not considered peak seasons. He said this had taken a further 4500 megawatts out of supply.

He said high prices would act as an incentive for generators to install water recycling plants.

"I'd make a plea for the market outcomes to be trusted, so the high prices act as incentives for alternative forms of cooling and energy."

He said the effort by users to get a government investigation of the market reflected the fact that many had failed to hedge their long-term position adequately.

Jeff Washusen, electricity specialist with the economics consultancy Marsden Jacobs, says there is a longer-term problem with the working of the electricity market.

"Since 1998, when the national electricity market first started, there has been virtually no market-initiated investment in base load capacity," he said.

Dr Washusen said new capacity in Queensland had been initiated by the Government. The only private sector investment had been small gas turbines supplying peak load.

He said the price of electricity on the national market had been enough to provide profitable operations for companies with installed generators, but did not deliver the incentive to build new capacity. As a result, the market had become tight, and high prices could be here to stay.